Redwood Trust, a California-based REIT, is about to launch its second private-label RMBS of the year, a US$375.2m prime-mortgage offering called Sequoia Mortgage Trust 2011-2 (SEMT 2011-2), according to a presale report released on Wednesday by Fitch Ratings.

The REIT is the only issuer of non-agency prime-jumbo MBS since the onset of the financial crisis. It completed two previous post-crisis private-label transactions: a US$290.4m offering in February, and a US$222m deal in April 2010, which was the first private US RMBS following the crisis.

Another issuer, Springleaf Financial, a consumer lender, recently helped to reopen the subprime segment of the mortgage sector at the beginning of September when it priced a US$292m RMBS offering.

Redwood Trust executives have been outspoken about the need to revive a mortgage market backed by private capital. Fannie Mae, Freddie Mac, and the FHA currently finance nearly 95% of the US mortgage market, a figure that many experts say is unsustainable in the long run.

The deal currently being prepped, SEMT 2011-2, will be backed by 473 prime fixed-rate mortgages originated by six originators, 80% of which were originated by First Republic Bank (53%) and PHH Mortgage (27%).

The rest of the pool was originated by Wells Fargo Home Mortgage (8%), SunTrust Mortgage (7%), PrimeLending (4%) and Sterling Savings Bank (0.9%). Distributions of principal and interest and loss allocations are based on a traditional senior-subordinate shifting-interest structure.

According to Fitch, the collateral pool consists of fully documented loans to mostly high-income borrowers with exceptionally strong credit profiles, low leverage on properties, and large reserve amounts. Third-party, loan-level due diligence was conducted on approximately 70% of the pool. Fitch reviewed the due diligence findings, and believes that the results of the review generally reflect strong underwriting controls.

Like Redwood's last transaction, SEMT 2011-2 also has exposure to properties in the earthquake-prone San Francisco region, albeit slightly less exposure than the previous offering.

This factor caused controversy for the February's deal, titled SEMT 2011-1, since Redwood originally hired Moody's to rate the issue, but ultimately disagreed with the rating agency's assessment that the deal's exposure to seismic activity-prone regions meant that it needed to be rated more strictly.

Ultimately, only Fitch received the mandate for that transaction, which contained nearly 60% exposure to California mortgage loans, with an emphasis on the San Francisco Bay Area.

The current deal has 53.6% concentration in California, and 31.3% of the properties are in the greater San Francisco area. Fitch said that it applied a penalty adjustment to the pool's lifetime default expectations to account for this exposure.

Moody's had been the sole rater of Redwood's 2010 deal, which had a much smaller concentration of California loans.

It is not yet clear whether Moody's will also be rating the current SEMT 2011-2 transaction.


So far, only Redwood Trust, a REIT, has issued a post-crisis private mortgage bond.

Banks are likely to be next. While several big banks are ramping up new private-label RMBS programs for the second half of 2011, a well-placed RMBS market source recently indicated that Wells Fargo (WFC.N) may be the first bank to issue a transaction, helping to reignite the non-agency market. The deal could surface as soon as the fourth-quarter, the source said.

Wells Fargo declined comment.

A drop in the loan-limit size that the GSEs will guarantee to US$625,500 from US$729,750, scheduled for October 1, is expected to create more supply for the non-agency mortgage sector and give impetus to bank issuers to get the private-label ball rolling again.

This increase in non-agency supply driven by the loan-limit decrease may actually be marginal, securitization specialists say, but banks acknowledge the overall advantages of re-establishing a well-structured, vibrant private mortgage securitization market, including renewed access to different funding sources and increased flexibility in lending operations.

Wells Fargo has so far weathered post-crisis MBS litigation comparatively better than other big banks, and therefore might be better positioned to line up an RMBS transaction earlier than Bank of America or JP Morgan, securitization sources said.

The San Francisco-based bank has agreed to pay US$590m to settle a class-action lawsuit associated with MBS from Wachovia Securities, which it acquired at the end of 2008, according to a recent SEC filing.